Liquidity preference theory MBA

Hello sir I would like to know about the Liquidity preference theory related to MBA so please provide me suitable information about this theory.

Liquidity Preference Theory (LPT) is a financial theory which suggests investors prefer and will pay a premium for assets which are very liquid.

About the LPT

It will pay less than market value for very illiquid assets.

This difference in price between market value and actual price represents the risk (or lack of it) associated with the liquidity of an asset.

A bond with a longer maturity typically pays more interest than one with a short maturity.

So the investors to buy the less liquid, more risky asset assuming longer-maturity bonds are harder to trade than those with a shorter maturity.

Related Terms to LPT

Asset

Bond

Liquidity

Market

Maturity

Trading

Yield

Yield Curve

Liquidity

Liquidity is a term which refers the ease and speed with which an asset can be converted into cash.

A liquid asset will be exchangeable for cash very quickly with no loss in value, whilst an illiquid asset will usually take time and may even lose value as a result.

Some examples of liquid assets are:

Savings Accounts
Stock
Options

Some examples of illiquid assets are:

Property
Money in investment funds
An asset for which there is no market

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Answered By StudyChaCha Member